TREASURIES-US yields dip in wake of Friday's plummet

By Chuck Mikolajczak

NEW YORK, Aug 4 (Reuters) - U.S. Treasury yields were slightly lower in choppy trading on Monday, alternating between modest gains and declines, after a sharp drop in the prior session following a weak payrolls report that pushed the 10-year yield to a one-month low.

Friday's government payrolls report for July fell short of expectations and there were sharp downward revisions to the data for May and June.

"There was a big move in the bond market and yields have been kind of going back and forth today," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"You would think that you'd probably have some type of give back today just based on Friday's movements, but there's a lot for investors to digest and it's just not one month data, it's three months of data that basically paints a completely different picture of what the labor market looked like from a week ago."

Markets had already been cautious before the soft report as U.S. President Donald Trump announced a fresh wave of tariffs on dozens of trading partners.

Trump later fired the commissioner of the U.S. Bureau of Labor Statistics, Erika L. McEntarfer, and the Federal Reserve said Governor Adriana Kugler was resigning early, giving the President the opportunity to appoint a replacement who could be more receptive to cutting interest rates.

"The market is also looking at the fact that we had the resignation by a Fed governor on Friday, so that gives Trump another seat plus the chair seat coming up," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas.

"So you're going to have four members on the board that are probably leaning dovish and the chair will be leaning dovish, whoever he selects. So the market is kind of banking on that, but a little bit surprised we didn't see some backup on that," Urano said.

The yield on the benchmark U.S. 10-year Treasury note US10YT=RR shed 1.8 basis points to 4.202% after dipping to 4.196%, its lowest since July 1. The yield tumbled 14 basis points on Friday, its biggest drop since April 3.

Expectations for a rate cut of at least 25 basis points by the Federal Reserve at its September meeting stand at 87.8%, according to CME's FedWatch Tool, up from 63.1% a week ago and below 50% before the jobs report was released.

The yield on the 30-year bond US30YT=RR declined 1.2 basis points to 4.795%.

More supply will hit the market this week as Treasury is scheduled to auction $58 billion in 3-year notes US3YT=RR on Tuesday, $42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 50.8 basis points after climbing to 54.9, its highest since July 18.

Economic data from the Commerce Department on Monday showed factory orders tumbled 4.8%, in-line with expectations of economists polled by Reuters, after an upwardly revised 8.3% increase in May as commercial aircraft orders plunged.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 1.4 basis points to 3.69% after falling to 3.659%, its lowest since May 1. The yield plummeted 24.7 basis points on Friday, its biggest daily drop since August 2, 2024.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.432% after closing at 2.409% on Friday, its lowest since July 10.

The 10-year TIPS break-even rate US10YTIP=TWEB was last at 2.355%, indicating the market sees inflation averaging about 2.4% a year for the next decade.